KARAM CHAND THAPAR AND BROS. LTD. v. INCOME TAX OFFICER
[Citation -1986-LL-0502-4]

Citation 1986-LL-0502-4
Appellant Name KARAM CHAND THAPAR AND BROS. LTD.
Respondent Name INCOME TAX OFFICER
Court ITAT
Relevant Act Income-tax
Date of Order 02/05/1986
Assessment Year 1979-80
Judgment View Judgment
Keyword Tags initiating action under section 263 • transfer of capital asset • memorandum of association • company in liquidation • industrial development • any other expenditure • gross dividend income • business expenditure • controlling interest • income from business • concessional rate • preference shares • managing director • source of income • trade investment • business purpose • voluntary return • interest payment • revisional order • dealer in share • capital account • cogent evidence • stock-in-trade • trading profit • business loss
Bot Summary: Ltd. in which on the facts of the case, it was held that where an assessee was holding shares and securities as its stock-in-trade and the dividend was received therefrom and none of the holdings were held by way of investment only and the assessee incurred expenditure to earn such income, then the dividend though assessable under a particular head, was really the business income of the assessee and the expenditure should be allowed under the head 'Profits and gains of business or profession' and cannot be apportioned against the income arising under different heads, i.e., business and the dividend. The assessee's learned counsel goes on to submit that the contention of the assessee was accepted in later years and in fact, the assessee has been treated as a dealer in shares. The assessee's learned counsel also refers to another decision of the Hon'ble Supreme Court in the case of New Era Agencies Ltd. v. CIT 1968 68 ITR 585 in order to stress that even if the assessee had purchased the shares of the company, it could not be said that assessee had acquired control over that company and that there was no material in the present case to say that the assessee had purchased the shares of Thapar Steinmuller Boiler Co. Ltd. for the purpose of investment. At the time of his argument, the assessee's learned counsel refers to different decisions of the Tribunal given for the earlier years in the case of the assessee itself in order to support the contention that the assessee was all along in the past a dealer in shares and the loss allowed by the ITO was valid and requires to be maintained. 628 to 631 of 1979 dated 28-5-1980 it was contended on behalf of the revenue that the assessee had sold the debenture and preference shares which had been held as investment as apparent from the balance sheet while the assessee contended that the shares and debentures were shown as investment in the balance sheet as per direction of the auditors whereas the true nature of these debentures and preference shares were that of a trading asset. In the case of the assessee and on the materials available, we do not find any fact on the basis of which we could say that the shares held by the assessee were rather formed part of the stock-in-trade and assessee had placed no materials for forming any inference as such. The assessee's learned counsel before us at the earlier state of his arguments, has also pointed out that it was wrong for the Commissioner to say that the interest borrowing should also be taken into account in working out the expenses or relief for the purpose of section 80M, read with section 80AA, as according to the assessee, the increase in investment was not necessarily relatable to increase in the borrowing as increase in the shareholding was also due to the fact that the bonus shares were issued by the company and held by the assessee as such.


appeal by assessee is directed against order of Commissioner as passed under section 263 of Income-tax Act, 1961 ('the Act'). appeal by assessee is that Commissioner erred in holding that assessment order made by ITO under section 143(3) of Act for assessment year 1979-80 was erroneous and prejudicial to interests of revenue and that Commissioner erred in not treating loss Rs. 90,000 as business loss arising from writing off of value of shares of company which went into liquidation after three years of its incorporation. It is also appeal by assessee that Commissioner erred in holding that shares of said company, i.e., Thapar Steinmuller Boiler Co. Ltd., being not stock-in- trade, but on investment basis. It is also submitted that Commissioner erred in holding that 16 per cent holding would make assessee investor in anticipation of high dividend inspite of fact that company went into liquidation within three years of its incorporation. contention of assessee is also that in treating said loss, as capital loss, Commissioner brought in extraneous and irrelevant facts on basis of presumption and surmises. 2. Commissioner in his order under section 263 for assessment year 1979-80 noted that he examined records of case of assessee and he found that assessment order was prima facie erroneous insofar as it is prejudicial to interests of revenue. In circumstances, he initiated proceedings under section 263 to which assessee objected and filed written statement. Commissioner also heard assessee's authorised representative. Commissioner pointed out that assessee is company and it carries on several business which included standing guarantee for loans, providing specialised services in diverse areas of business activities in addition to business in mining iron and manganese ores, selling agency, etc. He pointed out that main source of income, however, was from dividend of shares and interest on other securities. Rs. 90,000 was claimed by assessee as business loss in respect of shares of above company purchased by assessee in 1963 at Rs. 1 lakh at rate of Rs. 10 per share for 1,000 shares. He pointed out that said company went into liquidation and in assessment year 1979-80, assessee received final dividend of Rs. 10,000 from liquidator. assessee wrote off balance of Rs. 90,000, i.e., Rs. 1 lakh minus Rs. 10,000. ITO allowed above amount as business loss on ground that assessee is dealer in shares. Commissioner pointed out that ITO failed to examine real issue, i.e., whether shares of above company were its investment or its stock-in-trade. He noted that fact that assessee had been held in some of earlier assessment years to dealer in shares, would not ipso facto prove that all investments in shares were its stock-in-trade. He pointed out that shares of this particular company were acquired as investment. He pointed out that 1,000 shares were acquired out of 6,071 shares when company was incorporated, i.e., holding was to extent of 16 per cent of total shares issued by company. He also noted that shares were acquired almost as soon as company was incorporated. He, therefore, inferred that assessee invested in shares of Thapar Steinmuller Boiler Co. Ltd, not with view to selling them at profit later, but as investor with view to earning highest rate of dividend. He observed that shares of that company were, therefore, in investment portfolio and loss should have been dealt with as provided under section 46(2) of Act and, therefore, ITO erred in allowing Rs. 90,000 as business loss. Hence, this appeal by assessee. 3. Apart from above issue, Commissioner also noted that largest part of company's income was from dividend and deduction under section 80M of Act would be allowable. He pointed out that after introduction of section 80AA deduction would be considered from net dividend income and not from gross dividend income. He noted that ITO was aware of this provision, but in working out net dividend, he deducted expense of Rs. 5,142 only from gross dividend which amounted to Rs. 78,08,487 during year. gross receipt from all sources were at Rs. 1,91,68,935 which included above dividend income. expenses were to extent of Rs. 1,26,10,329 out of which ITO considered Rs. 5,142 only to be relatable to dividend income and rest as relatable business of assessee. He also pointed out that expenses included interest of Rs. 22,79,402. He also pointed out that expenses included interest or any other expenditure was held by ITO to be relatable to dividend income. result was that on ITO's finding, deduction under section 80M has been computed almost on gross dividend, which according to Commissioner, was contrary to express provision of Act. Hence, Commissioner considered ITO's order to be erroneous. 4. appeal by assessee is that Commissioner having himself failed to correlated any part of interest paid and expenses incurred by assessee to cost of shares and expenses for any dividend, made futile attempt by setting aside assessment order and directing ITO to allocate portion of said interest to dividend income. 5. As mentioned earlier, assessee's authorised representative appeared before Commissioner and made various submissions. It was contended before him that assessee is dealer in shares as has been held in several orders of assessments and appellate orders of earlier years. It was stressed that there were actual sales and purchases of shares in earlier years and, therefore, shares were held by assessee as stock-in-trade and that loss was rightly allowed by ITO. It was argued that there was not error in order of ITO. It was argued also that since assessee is dealer i n shares and having other business activities, expenses entirely related to business and no part of expenditure could be allocated to dividend income relaying on decision in case of CIT v. New India Investment Corpn. Ltd. [1978] 113 ITR 778 (Cal.) and CIT v. Tata Engg. & Loco motive Co. Ltd [1981] 131 ITR 19 (Bom.). It was urged, therefore, that gross dividend should be considered for computing deduction under section 80M. 6. It was alternatively argued that even if shares were held to be stock- in-trade, no part of expenditure should be allocated to dividend income particularly when dividend income was derived from three companies only and there was no scope for incurring substantial expenditure in collecting dividends. In respect of interest payment, it was contended that there was no evidence to show that shares were purchased out of borrowed funds and increase in shareholding of three companies over years has been mainly from issue of bonus shares and, therefore, interest debited to profit and loss account was not chargeable against dividend income. 7. Commissioner considered various aspects of matter and facts available. He declined to accept contention made before him. He declined to accept as general proposition that all shares of dealer in shares would be stock-in-trade, as dealer in share may also have certain shares in investment portfolio. He observed that if shares were purchased to acquired controlling interest, then such shares cannot form stock-in-trade, which issue came up before Hon'ble Supreme Court in case of assessee for assessment year 1955-56. Commissioner also referred to facts of that year in Karam Chand Thapar & Bros. (P.) Ltd. v. CIT [1971] 82 ITR 899 (SC). He noted that if nature of source is examined in light of those principles laid down by Hon'ble Supreme Court, it would have to be held that shares of Thapar Steinmuller & Boiler Co. Ltd. were investment of assessee. He mentioned that assessee's holding was substantial and that how in name of company, name of Thapars appeared. He mentioned that apparently shares were purchased soon after incorporation and possibly out of first issue of shares and it was some sort of joint venture between assessee and German company. Commissioner inferred that these shares could not have been acquired with view to dealing with them. 8. Commissioner went on saying that shares of other companies from which bulk dividend has been earned, had not appeared to be stock-in- trade of assessee. He found that out of Rs. 78,08,487, being dividend, Rs. 77,65,471 was dividend income received from three companies only, namely, Ballarpur Industries Ltd., Greaves Cotton Ltd. and Jagajit Cotton Textiles Ltd. which was launched and controlled by Thapar group. He, therefore, inferred that assessee has controlling interest in them and shares of these companies were rarely sold even if shares have been quoted at very high price in market. He also noted that shares were held for long period. He felt that sale of shares, if any, was not to outsiders but to people of same group or their associates and, therefore, shares were not sold by dealer in shares. Commissioner declined to consider shares of t h e s e companies as stock-in-trade of assessee as in his view, circumstances indicated that they were investment of assessee. circumstances indicated that they were investment of assessee. 9. In circumstances, he inferred that since assessee was not dealer in share, decision of Hon'ble Calcutta and Gujarat High Courts would not apply to facts of case. He noted that portion of expenses, particularly interests, should be allocated to dividend income with result that amount deductible under section 80M will be substantially reduced. 10. Commissioner also considered alternative argument that even i f shares were held to be investments of assessee, expenses should not be allocated to dividend income as almost entire dividend has been received from three companies only for which must expenditure was incurred in collecting dividends. It was stated that collection charges were very nominal and ITO had already deducted same from gross dividend income and no administrative expenses were incurred for that purpose. It was also submitted that shares have not been purchased out of borrowings as capital and resources were sufficient to account for shareholdings. It was also stressed that increase in number of shares was mainly on account of bonus issues which did not cost anything to assessee. It was, therefore, urged that interest was payable on borrowings which have been utilised only for business purpose and there was no question of charging interest to dividend account. 11. Commissioner found some force in submission relating to administrative expenses. He, however, did not accept point that no expenditure other than collection charges, were deductible to dividend income, particularly when shareholding of assessee was substantial in number of companies. According to him, it cannot be argued that assessee could manage shareholding without incurring any expenditure and, as such, some portion of administrative and office expenses would have to be charged to dividend account. In respect of interest payment, Commissioner found that it was not possible to identify individual borrowings and purpose and that it was not possible to locate in what lots and when shares were purchased. He pointed out that study on balance sheet for number of years would give indication of increase in shareholding was accompanied by increase in borrowings, which point required examination. 12. He, therefore, concluded that ITO did not apply his mind to real issues in assessment and ITO was carried away by fact that assessee had been to be dealer in shares for certain transactions and that conclusion and decision of ITO were based on assumption which correctness was open to serious doubt. Commissioner noted that case required much more detailed examination on above issues which ITO had failed to do and result was that assessment was erroneous and was prejudicial to interests of revenue. He, therefore, set aside assessment order and directed ITO to examine case thoroughly for fresh disposal. 13. Hence, this appeal by assessee. 14. It is vehemently urged by assessee's learned counsel that there was absolutely justification for Commissioner to take action under section 263. learned counsel at first instance points out that Commissioner by his first notice dated 7-3-1983 asked assessee to show cause why action should not be taken under section 263. It is stated that for that reasons, Commissioner referred one point only, i.e., regarding allowance of Rs. 90,000 as business loss which according to Commissioner, was erroneous. It is seen from copy of notice that Commissioner noted that above loss claimed by assessee was on sale of shares of Thapar Steinmuller & Boiler Co. Ltd. (in liquidation). After disposing assets of company, liquidator paid Rs. 10,000 to assessee per pro-value of shares held by assessee. In circumstances, he was of view that ITO was wrong in treating above loss as business loss, which was capital loss in view of section 46(2). It is submitted by assessee's learned counsel that that was first and primary ground of Commissioner for taking action. It is submitted that later on Commissioner by separate notice dated 25-4-1983 has stated in addition that shares in question did form capital asset of assessee and not stock-in-trade, while referring to provisions of section 46(2). According to assessee's learned counsel, assessee has been dealer in shares all throughout in past and shares were held as stock-in-trade. It is pointed out that in respect of shares of above company were purchased in 1963, but unfortunately that company went into liquidation in 1966. It is argued on behalf of assessee that Commissioner went wrong in assuming that shares of that company as investment and result of transaction was capital loss. It is also pointed out that Commissioner has taken pointed regarding deduction of expenses from dividend income for allowing relief under section 80M, read with section 80AA as amended by Finance Act, 1980. According to him ITO did consider this issue as could be apparent from order of assessment itself and in fact, ITO did allow relief under section 80AA and that it was only net dividend income had been worked out by ITO in assessment order itself and, therefore, there was no question of saying that ITO had failed to apply his mind as in fact, it was Commissioner who had failed to apply his mind to facts of this case. According to assessee's learned counsel Commissioner wrongly assumed that ITO did not consider this aspect of matter, while forming opinion that order of assessment was erroneous. It was not case of Commissioner that expenses have not been allocated properly and that in fact, pro rata allocation of expenses cannot be made. In this connection assessee's learned counsel refers to decision of Hon'ble Calcutta High Court in case of New India Investment Corpn. Ltd. (supra) in which on facts of case, it was held that where assessee was holding shares and securities as its stock-in-trade and dividend was received therefrom and none of holdings were held by way of investment only and assessee incurred expenditure to earn such income, then dividend though assessable under particular head, was really business income of assessee and expenditure should be allowed under head 'Profits and gains of business or profession' and cannot be apportioned against income arising under different heads, i.e., business and dividend. It is submitted, therefore, that Commissioner cannot on facts or in law allocated such expenses as relatable to dividend income only. On behalf of assessee further reliance is placed on decision of Hon'ble Gujarat High Court in case CIT v. Cotton Fabrics Ltd. [1981] 131 ITR 99, in which it was found that assessee was business income and interest on borrowing would be deductible and no apportionment can be made. 15. assessee's learned counsel goes on to submit that contention of assessee was accepted in later years and in fact, assessee has been treated as dealer in shares. Reference is made to assessee's letter dated 19-3-1982 addressed to ITO which is at page 13 of paper book as well as to instruction of concerned IAC under section 144B of Act of ITO for assessment year 1978-79. It is submitted also that for earlier year, i.e., 1977-78 same question was there as per IAC's instruction which appears at page 14 of paper book. 16. It is, therefore submitted that on facts of case, Commissioner wrongly assumed jurisdiction under section 144B particularly when dividend income was mainly from three companies for which no possible expenditure could have been incurred beyond what had been claimed by assessee and allowed by ITO in assessment order itself. At stage, it is pointed out by learned counsel that for assessment year 1979-80 which is presently before us, there was no instruction by concerned IAC under section 144B. In course of his arguments learned counsel also refers to decision of Hon'ble Calcutta High Court in case CIT v. Produce Exchange Corpn. Ltd. [1963] 50 ITR 308 in which finding of Tribunal that loss in purchase and sale of shares was business loss and was finding of fact as that assessee was found to have dealt in shares and transactions were made at prevailing rate and one of objects of company also was to carry on business in dealing in shares. He also refers to decision of Hon'ble Patna High Court in CIT v. Shanti Prasad Jain [1967] 66 ITR 289 in which it was found that assessee who was businessman was also dealer in share and, therefore, loss was admissible deduction arising out of business of assessee in share dealing, on findings of Tribunal. It is stressed on behalf of assessee that buying and selling of shares by assessee were at prevailing prices and not at concessional rate and, therefore, there was no question of treating assessee as not dealer in shares. It is also urged that that was also one of objects of company dealing in shares. 17. assessee's learned counsel refer also to page 23 of paper book in which detailed statement of sale of stocks and shares from assessment years 1961-62 to 1976-77 during which profit had been taxed as trading profit and resulted loss was allowed as business loss in all those years and that in fact, for all those earlier years, assessee was held to be dealer in stock and shares. 18. Alternatively, it is also argued on behalf of assessee that ITO has correctly appreciated facts of case after considering fact that acquisition of shares was not out of borrowings as addition of shares were out of issue of bonus shares from companies concerned and, therefore, there is no question of utilisation of borrowed money for acquisition of new shares as alleged by Commissioner. It is also argued that even assuming that there was investment in shares, ITO's order allowing interest payment was not at all erroneous. 19. It is further submitted on behalf of assessee that loss incurred by assessee to extent of Rs. 90,000 as mentioned earlier, was correctly considered and treated by ITO as business loss. shares of that concerned company were purchased in 1963 to extent which worked out to about 16 per cent of total shareholding and that by no stretch of imagination, it can be said that person having 16 per cent shareholding would have controlled interest in that particular company. It is further urged that in fact, said company went into liquidation only within short period, i.e., in 1966. At this stage, assessee learned counsel refers to decision of Hon'ble Supreme Court in case of Karam Chand Thapar & Bros. (P.) Ltd. (supra) being case of assessee itself. It is stated that for that much earlier year, assessee incurred loss in sale of block of shares in 1955 and those shares were held by assessee for about 14 years. It is elaborately submitted by assessee's learned counsel that decision for that earlier year was rendered on facts available for that year and, therefore, ratio would not be applicable to facts of present case. He also refers to another decision of Hon'ble Supreme Court in case of CIT v. Associated Industrial Development Co. (P.) Ltd. [1971] 82 ITR 586, in order to stress that assessee had placed all full facts and materials to show that those shares of liquidated company were held by assessee as stock-in-trade and not by way liquidated company were held by assessee as stock-in-trade and not by way of investment, in order to refute stand taken by Commissioner in instant case. It is urged that future of above company, i.e., Thapar Steinmuller & Boiler Co. Ltd. was bleak and that in fact, it went into liquidation within three years of acquisition of shares and, therefore, loss was entirely business loss. According to assessee's learned counsel that on facts of case, Commissioner has wrongly assumed jurisdiction under section 263 on facts of case and has wrongly complained that ITO did not apply his mind to real issues in assessment. It is also urged that ITO did not assume any particular fact but had based his decision on materials available for that year as well as on decisions for earlier years. It is submitted, therefore, that order of Commissioner under section 263 may be quashed. 20. On other hand, submissions of learned departmental representative are that Commissioner had assumed proper jurisdiction in this case in view of facts narrated and discussed in order of Commissioner (Appeals) itself. According to him, by first notice, Commissioner has given basic ground why action under section 263 was taken and in second notice additional materials were pointed out to assessee by Commissioner to enable assessee to meet and show cause i n respect of this point. It is submitted that additional materials were supporting matters although they may not constitute basic ground on which order of Commissioner was passed. It is urged that even otherwise, assessee would not in any way by prejudiced as assessee would get ample opportunity before ITO to state full facts relying on decisions of Hon'ble Supreme Court in case of Rampyari Devi Saraogi v. CIT [1968] 67 ITR 84. He also placed reliance on another decision that Hon'ble Supreme Court in case of Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 in which on facts of case, it was held that where income has not been earned or not assessable, yet assessee filed voluntary return, to assist someone else who would have been assessed at higher figure and assessment so made o n such return would be erroneous and prejudicial to interests of revenue. It is submitted before us that in similar situation, order under section 263 was sustained. In our opinion, this decision has no being on facts of case as same are distinguishable. learned departmental representative also refers to another decision of Hon'ble Supreme Court in case of CAIT v. Lucy Kochuwareed [1976] 103 ITR 799 which related to revisional order of Commissioner under Kerala Agricultural Income-tax Act, 1950, related to excessive allowance allowed by assessing officer in respect of expenses incurred by assessee. Commissioner set aside that assessment order for fresh disposal by assessing officer after examining each item of expenditure individually. action of Commissioner was sustained. Further reference is made to decision of Hon'ble Madras High Court in case of Indian Textiles v. CIT [1986] 157 ITR 112 in which under similar situation revisional order of Commissioner under income-tax relating to relief allowed without verification by assessing officer was held to be order prejudicial to interests of revenue. It was also held in that case that if at least in respect of one item, order of assessing officer was found to be prejudical to revenue, initiation of proceedings under section 263 could not be questioned. On behalf of revenue, further reliance is placed on decision of Hon'ble Supreme Court in case of Karam Chand Thapar & Bros. (P.) Ltd. (supra) being case of assessee itself. It is submitted by learned departmental representative that in that decision clear guidelines have been enunciated on facts of case for that year, although it has not been said in so many words. It is submitted that facts prevailing during year under consideration, were similar to those of year dealt in by Hon'ble Supreme Court. It is highlighted that shares in present case, had not been sold within three years and assessee bought those shares apparently right from inception and extent of such holding was about 16 per cent of total share which gave assessee controlling power over affairs of company. It is urged that ITO had not applied his mind to such vital aspects of this matter, before allowing loss as stated above. 21. It is also submitted that proper action and direction were given by Commissioner in respect of relief allowable under section 80M. It is stressed that Commissioner has given basic facts and grounds before coming to his conclusion. it is highlighted that assessee made huge borrowings and was not possible to identify particular fund out of which assessee bought new shares for holding as investment. It is repeatedly stressed that in case of assessee itself in Karam Chand Thapar & Bros. (P.) Ltd. (supra) Hon'ble Supreme Court has dealt with identical facts and circumstances. It is also urged that on 31-3-1979 small portion of shareholding was sold by assessee, which fact alone would go to show that assessee was not dealer in shares as contended by assessee. It is pointed out that assessee has controlling interest in three companies and assessee bought shares of Thapar Steinmuller & Boiler Co. Ltd. almost at inception of that company and this fact will establish that intention and purpose of possession of shares of that company, was for purpose of investment and for acquiring controlling interest. learned departmental representative refers to decision of Hon'ble Supreme Court in case of Kishan Prasad & Co. Ltd. v. CIT [1955] 27 ITR 49, in which amongst other things, it was held on facts of that case that circumstances whether transaction was or was not within company's power has no bearing on nature of transaction or on question whether profits arising therefrom were capital accretion or revenue income. assessee in that decided case was formed in 1917 with object amongst other things of carrying on general business and trade of commission agents, etc. managing director of assessee-company entered into agreement with sugar syndicate on condition that assessee should subscribe for shares and undertook to sell shares of syndicate and assessee would be given managing agency of mill when such mill was erected. mill was not erected and agreement fell through. shares of syndicate was sold which was in excess of what they have been paid for. It was held that purchase of shares was investment and not adventure and was not in nature of income from business and was, therefore, not liable to tax. It is submitted by learned departmental representative that in instant case also shares were purchased by assessee for purpose of investment. Further reference is made to another decision of Hon'ble Supreme Court in case of Ramnarain Sons (P.) Ltd. v. CIT [1961] 41 ITR 534. That assessee was found to be dealer in shares and also carried on business as managing agents of other companies. In order to acquiring managing agency, assessee purchased certain shares at higher rate which was, subsequently, sold at lower rate incurring loss thereof. It was held that purchasing shares in excess of market price was to facilitate acquisition of managing agency which was capital asset and intention of purchasing such shares was not acquired part of stock-in-trade. It was also held in that case that neither circumstances that assessee borrowed money at interest to purchase shares nor fact that it was dealer in shares and was authorised by memorandum of association to deal in shares was of any effect. It was further held that subsequent disposal of some of such shares by assessee would not convert what was capital acquisition into acquisition in nature of trade. It was stressed that one has to consider in light of intention of assessee having regard to legal requirements which are associated with concept of trade or business. learned departmental representative further refers to another decision of Hon'ble Supreme Court in case of CIT v. National Finance Ltd. [1962] 44 ITR 788 in which similar view was expressed that issue has to be decided in light of intention of assessee having regard to legal requirements which are associated with concept of trade or business. assessee that decided case, claimed loss in dealing in shares. Guiding principles were discussed in that decision. On behalf of revenue, reliance is also placed on another decision of Hon'ble Supreme Court in case of Rameshwar Prasad Bagla v. CIT [1973] 87 ITR 421. facts of that case were that shares were purchased which were agreed to be bought as part of negotiation for acquiring managing agency. It was found that shares were not acquired as stock-in-trade. 22. In respect of other aspects of issue, it is submitted on behalf of revenue that increase in borrowing made by assessee during year was reflected in increase in shareholding. This aspect of matter had not been enquired by ITO, which he should have done. Reference is made to decision of case of Addl. CIT v. Mukur Corpn. [1978] 111 ITR 312 (Guj.) in which it was held that for passing order under section 263 Commissioner need not come to any definite conclusion before setting aside assessment order with direction for fresh assessment. learned departmental representative also relies on decision of Hon'ble Delhi High Court in case of Gee Vee Enterprises v. Addl. CIT [1975] 99 ITR 375 in which amongst other things it was held that Commissioner can regard assessment order as erroneous if ITO had not made further enquiries before accepting statement made by assessee in return and that ITO is not only adjudicator but also investigation and he cannot remain passive when on face of records further enquiry was called for. It is urged that in such situation as similarly in present case, Commissioner has passed valid under section 263. It is submitted by learned departmental representative that decision in Cotton Fabrics Ltd.'s case (supra) relied on by assessee would not be applicable to facts of case. 23. It is also stressed that ITO had not considered properly requirements and provisions of section 80A of Act though this section was mentioned in assessment order. It is urged that mere fact that such mentioning of section in order would not go to show that ITO had dealt with matter properly on facts of case. It is urged that on facts of case, Commissioner has assumed proper and valid jurisdiction in initiating action under section 263 and his subsequent order and direction to ITO require to be sustained. 24. In reply, assessee's learned counsel mentions that Tribunal in their orders for later years had distinguished facts as available in Karam Chand Thapar & Bros. (P.) Ltd's case (supra) being case of assessee for assessment year 1955-56. That order of Tribunal was for assessment year 1962-63 and order was dated 18-2-1974 which is at page 43 of paper book. It is urged that Tribunal has discussed similar issue for that year, at length relating to acquisition of shares by assessee relating to companies of same group and that there was nothing to suggest that acquisition and purchase of shares was for anything other than assessee's normal commercial purpose. It is also noted by learned counsel that it was also observed by Tribunal that in fact of undisputable nature of assessee's business as dealer in shares, it would be for department to prove that dealing were for extra commercial consideration. For that assessment year, i.e., 1962-63, Tribunal found that sale of shares of Standard Refinery & Distillery Ltd. and of Malwa Sugar Mills Ltd. were not at prices lower than market rate. On facts for that year Tribunal sustained allowance of loss claimed by assessee to be business loss. sustained allowance of loss claimed by assessee to be business loss. assessee's learned counsel also refers to another decision of Hon'ble Supreme Court in case of New Era Agencies (P.) Ltd. v. CIT [1968] 68 ITR 585 in order to stress that even if assessee had purchased shares of company, it could not be said that assessee had acquired control over that company and that there was no material in present case to say that assessee had purchased shares of Thapar Steinmuller & Boiler Co. Ltd. for purpose of investment. It is urged, therefore, that claim of assessee may be accepted and order of Commissioner may be quashed. At time of his argument, assessee's learned counsel refers to different decisions of Tribunal given for earlier years in case of assessee itself in order to support contention that assessee was all along in past dealer in shares and, therefore, loss allowed by ITO was valid and requires to be maintained. 25. We have gone through orders of authorities below along with t h e various papers placed in paper book for our consideration. Commissioner was of view that ITO had not applied his mind to facts of this case, on lines as facussed and highlighted by Commissioner in impugned order. He was of opinion that ITO was carried away by fact that assessee was dealer in shares in respect of certain transaction whereas purchase of shares of Thapar Steinmuller & Boiler Co. Ltd. was patently for purpose of investment. We have gone through orders of Tribunal for earlier years as placed before us. In those orders discussion was made about sale of shares of certain specific companies which resulted in loss and which was claimed to be business loss. ITO disallowed claim of assessee which was ultimately allowed by Tribunal for assessment years 1961-62, 1962-63 and onwards. Amongst other things, it is seen that before Tribunal for assessment years 1966-67 to 1968-69 and 1970-71 in case of assessee being IT Appeal Nos. 628 to 631 (Cal.) of 1979 dated 28-5-1980 it was contended on behalf of revenue that assessee had sold debenture and preference shares which had been held as investment as apparent from balance sheet while assessee contended that shares and debentures were shown as investment in balance sheet as per direction of auditors whereas true nature of these debentures and preference shares were that of trading asset. It was pointed out that similar issue came up before Tribunal in IT Appeal Nos. 4803 (Cal.) of 1969-70 and Tribunal vide order dated 18-2-1974 had held against department. For same reasons, Tribunal for assessment year 1966-67 onwards also rejected stand. It is true that what has been recorded in balance sheet in respect of shares, would not be conclusive or decisive. But invariably it is one of points for consideration. In this connection we may refer to decision of Hon'ble Supreme Court in case of Ashoka Viniyoga Ltd. v. CIT [1972] 84 ITR 264 in which amongst other things on facts of that case, it was held that Tribunal was right in placing reliance on resolution of company for sale as originally recorded in books of company since no material was placed to show why reference to 'investment' was scored out. It was also held that it was true that name given to transaction in document was not conclusive as to its true character. In absence of satisfactory explanation it was open to Tribunal to rely on admission of assessee in its own record. In case before us, assessee has drawn up balance sheet on basis of auditor's report. shares of different companies held by assessee were considered as trade investment including shares of Thapar Steinmuller & Boiler Co. Ltd. In fact, in profit and loss account for year under consideration, it is seen that income from sales as per Schedule VII was on iron and manganese ore, diesel oil, sale of agricultural products, etc. whereas income from investments and interest received has been shown at Schedule VIII which include dividend income, etc. Thus, records of assessee itself as well as balance sheet for year under consideration indicate that shares of Thapar Stainmuller & Boiler Co. Ltd. were held as investment and in fact, dividend income from other companies was considered as income from investment at Schedule 'G'. value of investment was shown either at cost of written down value. That apart, in balance sheet stock-in-trade as appearing in Schedule 'E' also comprised of closing stock of only iron, manganese ore, diesel oil, etc. shares of Thapar Steinmuller & Boiler Co. Ltd. were not shown or declared as stock-in-trade by assessee. Similary, Schedule 'I' indicated opening stock of iron ore and diesel oil and agricultural farm only. So was position in respect of trading purchase. Profit on share sold as per Schedule IX was nil during year and other incomes were from sources other than share dealings. In another case of Investment Ltd. v. [1970] 77 ITR 533, Hon'ble Supreme Court on facts of that case held that though it was true that order made in assessing income of one year regarding nature of transaction or income received therefrom was not conclusive in another year, finding for other assessment years that shares and securities were stock-in-trade was good or cogent evidence of nature of transaction and that no firm conclusion could be drawn for description by assessee in balance sheet by its stock and 'investment' and from valuation of securities and shares at cost. 26. facts of present case relating to assessment year 1979-80 were that assessee did not sell shares of Thapar Steinmuller & Boiler Co. Ltd. as that company went into liquidation and liquidator paid Rs. 10,000 as final dividend in lieu of shares surrendered by assessee to liquidator. book value of those shares is at Rs. 1 lakh at rate of Rs. 10 per share for 1,000 shares. As stated earlier, shares were purchased by assessee some time in 1963 which could have been sold had same been acquired by assessee for purposes of its stock-in-trade. assessee on facts of case had surrendered those shares to liquidator which cannot be considered as sale or transfer. It is in this context that we have to consider provision of section 46(2) referred to by Commissioner in first and second notices to assessee while initiating proceedings under section 263. In case of CIT v. R. M. Amin [1977] 106 ITR 368 Hon'ble Supreme Court on facts of case considered that there was no transfer of capital asset within meaning of section 2(47) of Act. When shareholder received money representing his shares on distribution of net assets of company in liquidation, he received that money in satisfaction of rights as shareholder and not by any operation or any transaction which amounted to sale, exchange, relinquishment, etc. Hon'ble Supreme Court referred to its earlier decision as in CIT v. Madurai Mills Co. Ltd. [1973] 89 ITR 45. But it went on to say that but for section 46(2) , it would not have been possible to charge tax under head 'Capital gains' on money received by shareholder from company on its liquidation. Commissioner in his notices had referred to provisions of this section on basis of which amongst other things, he felt that order of ITO was erroneous. It is seen that ITO has not at all taken into account for consideration amount received by assessee from liquidator keeping in view provisions of section 46(2) as discused above. Hon'ble Madras High Court also in case of CIT v. C. T. Oppilal Achi [1977] 109 ITR 126 has held on facts of that case that section 46(2) is charging section, but in will apply only in relation to companies as defined in section 2(17). Similar is view of Hon'ble Bombay High Court in case of Cable & Wireless Ltd. v. V. H. Gangal [1973] 90 ITR 84. Also case of same assessee was V. H. Gangal, ITO v. Cables & Wireless Ltd. [1977] 107 ITR 293 (Bom.). 27. As indicated earlier, assessee's learned counsel had drawn out attention to grounds adopted by Commissioner for initiation of proceedings under section 263 , as narrated in first and in second notices issued by him to assessee in which Commissioner had also referred to point that Rs. 90,000 was capital loss in terms of provisions of section 46(2) whereas this amount was treated as business loss in assessment order. In this connection we may refer to decision in case of India Textiles (supra) as decided by Hon'ble Madras High Court in which amongst other things, on facts of that case, it was held that if at least in respect of one item ITO's order was found to prejudicial to interest of revenue, initiation of proceedings under section 263 could not be questioned. 28. In some of cases cited earlier on behalf of assessee, it is been that facts were distinguishable. In case of Cotton Fabrics Ltd. (supra), assessee was found to be dealer in shares and from that premises, decision was rendered by Hon'ble High Court regarding certain claims of expenditure attributable to income from dividends. Similarly, in case of New India Investment Corpn. Ltd. (supra), Hon'ble Calcutta High Court had proceeded on basis that where assessee was holding shares and securities as stock-in-trade and dividend received therefrom and none of holdings of assessee were held by way of investment only, expenses incurred to such income would be allowable as business expenditure and same cannot be apportioned under two different heads, i.e., 'Business' and 'Dividend'. It was also held that even if income was solely referable to 'Dividend'. It was also held that even if income was solely referable to dividend there cannot be any apportionment as entire expenditure would then be allowable against dividend earned. In present case before us, dispute of Commissioner was that shares held by assessee in Thapar Steinmuller & Boiler Co. Ltd. were not shares held by dealer in shares or stock-in-trade. Similarly, in case of Santi Prasad Jain (supra) it was found that assessee was businessman and also dealer in shares who claimed loss on sale of certain shares and loss was; accordingly, considered as admissible deduction. In case of Produce Exchange Corpn. Ltd. (supra), cited at time of hearing before us, it is seen that Hon'ble Calcutta High Court has noted that assessee was carrying on business in various lines and one of objects of company was dealing in shares etc. It was held amongst other things that fact that purchaser acquired secretaryship of company whose shares were sold was not decisive of question whether transaction was investment or dealing in shares. 29. contention before us on behalf of assessee is that shares were held by assessee as stock-in-trade which fact was also accepted by appellate authorities for earlier years. As stated in preceding paragraph, contentions of assessee are that facts of present year were different from those of earlier year, i.e., 1955-56 as decided by Hon'ble Supreme Court in Karam Chand Thapar & Bros. (P.) Ltd.'s case (supra). We have indicated earlier that from balance sheet, profit and loss account, etc., we notice that these items including shares of Thapar Steinmuller & Boiler Co. Ltd. as per books of account of assessee were held as trade investment and not as stock-in-trade. profit and loss account also indicated same position and value of closing stock also reflected only value of materials of manganese ore, etc. From facts available in present case before us and as indicated by Commissioner, shares of Thapar Steinmuller & Boiler Co. Ltd. were apparently acquired by assessee when company was incorporated. company acquired 1,000 shares out of 6,071 shares. assessee did not sell those shares till same were surrendered to liquidator, as indicated earlier. Thus, at no point of time before said surrender of shares, there was any indication that assessee intended to sell those shares, as we find no materials to contrary. Thus, intention in purchasing those shares was not to acquire them as part of stock-in-trade of its business in shares. In case of Ramnarain Sons (P.) Ltd. (supra) Hon'ble Supreme Court held that in considering whether transaction is or is not adventure in nature of trade, problem must be seen in light of intention of assessee having regard to legal requirements which are associated with concept of trade or business. In similar situation in case of Oriental Investment Co. Ltd. v. CIT [1957] 32 ITR 664, Hon'ble Supreme Court on facts of case, held that mere fact that company has within its objects dealing investment in shares, does not give assessee characteristics of dealer in shares but in other circumstances, if proved, it may be relevant for purpose of determining nature or activities of company. 30. As it was held by Hon'ble Supreme Court in case of Associated Industrial Development Co. (P.) Ltd. (supra) whether particular holding of shares is by way of investment or formed part of stock-in-trade is matter which is within knowledge of assessee and he should in normal circumstances be in position to produce evidence from his record as to whether he has maintained any distinction between those shares which are his stock-in-trade and those which are held by way of investment. In case of assessee and on materials available, we do not find any fact on basis of which we could say that shares held by assessee were rather formed part of stock-in-trade and assessee had placed no materials for forming any inference as such. 31. As mentioned in earlier paragraphs, learned departmental representative places reliance on decision of Hon'ble Supreme Court in case of assessee itself as in Karam Chand Thapar & Bros. (P.) Ltd.'s case (supra). We have gone through that decision for out consideration also. 32. assessee's learned counsel before us at earlier state of his arguments, has also pointed out that it was wrong for Commissioner to say that interest borrowing should also be taken into account in working out expenses or relief for purpose of section 80M, read with section 80AA, as according to assessee, increase in investment was not necessarily relatable to increase in borrowing as increase in shareholding was also due to fact that bonus shares were issued by company and held by assessee as such. In this connection, it is necessary to refer to another decision of Hon'ble Supreme Court in case of CIT v. Madan Gopal Radhey Lal [1969] 73 ITR 652 in which on facts of case, it was held that bonus shares, by mere fact that they were received by assessee in respect of their stock-in-trade and as accretion thereto did not become part of stock-in-trade and that bonus shares were received as capital and they could be converted by assessee into their stock-in-trade or retained as their capital asset. Accordingly, if any portion of bonus shares was sold or disposed of, same would be on capital account although bonus shares were received in respect of shares held by assessee as stock-in- trade. It was also held that trade may acquire commodity as stock-in-trade or investment and in each case question is one of evidence to be gathered f r o m evidence of conduct by acquirer and his dealings with commodity. As repeatedly mentioned earlier, assessee did not sell or dispose of shares of Thapar Steinmuller & Boiler Co. Ltd. since their purchase till same was surrendered to liquidator for which Rs. 10,000 were received which was considered by Commissioner with reference to section 46(2) as discussed earlier. 33. Having regard to entirety of facts and circumstances of case and after taking into account decisions relied on by both sides and also after taking into account decision considered by us above, we are of opinion that Commissioner had valid jurisdiction in initiating proceedings under section 263 , on facts of case. From brief narration of facts, we agree with Commissioner in saying that ITO did not apply his mind to issue involved and case required more detailed examination, which should have been done by ITO originally. In view of circumstances and facts of case, order of ITO was erroneous and Commissioner has validly assumed jurisdiction under section 263 and, in our opinion, direction of Commissioner to ITO to examine case thoroughly and to frame assessment afresh requires to be substained. In circumstances, we reject assessee's appeal on all points. 34. In result, appeal is dismissed. *** KARAM CHAND THAPAR AND BROS. LTD. v. INCOME TAX OFFICER
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